Uzbekistan Enterprise Institution Building Loan (Loan No. 4353UZ)

Proposed Amendment to the Loan Agreement

1. It is proposed to amend two of the Project Development Objectives (PDOs) of the EIBL, in relation to the Privatization and Capital Market Components. The amendments entail the narrowing down of the original project objectives for these two components, with a focus on completing at least one successful sale of a large scale enterprise by the end of the extended loan period, i.e. 3 1 December 2004, and on completing ongoing technical assistance being rendered to the Securities Center within the Capital Markets Component.

2. The present PDO in relation to the Case-by-Case Privatization component reads as follows: “The objectives of the project are to.. .(b) Support the Borrower’s implementation of case-by-case privatization to improve enterprise efficiency and attract foreign know-how and capital”. It is proposed to narrow and focus this PDO as follows: (b) “Support the Borrower’s implementation of case-by-case privatization to improve enterprise efficiency and attract foreign know-how and capital, through (i) the preparation for privatization of at least ten (10) large scale enterprises; and (ii) the sale of at least one (1) large scale enterprise.”

3. The present PDO in relation to the Capital Markets Component reads as follows: “The objectives of the Project are to.. .(c) Enhance effectiveness and widen public participation in capital markets and protect shareholders.” It is proposed to amend this PDO as follows: (c) “Enhance effectiveness in the functioning of the capital markets, by improving access to and facilitating the flow of information on issuers, turnover and prices.”

4. The remainder of the PDOs remain unchanged.

Background

5. The EIBL Loan of US$28 million was signed on July 10, 1998, and had three main components to support:

(i) post privatization advisory services,

(ii) case-by-case privatization of large and strategic enterprises and,

(iii) developing capital markets.

The Loan was closed on December 31,2003, with all PDOs and KPIs rated as unsatisfactory (See Attachment 1) and an un-disbursed balance of US$ 20,017,978.35.

6. The Minister of Finance of Uzbekistan requested a one year extension of the closing date to allow for completion of the ongoing case-by-case privatization transactions and the capital market technical assistance program. In this request, the Government also requested to cancel US$17.6 million from the remaining balance. The Bank has decided to extend this loan, subject to the approval of the amendment by the Executive Directors, to enable the pending transactions to proceed.

7. The Government has provided a detailed proposal, including timetables, for completion of the ongoing work. The proposed plan has the endorsement of the highest levels of the Government,

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confirmed through a Cabinet of Ministers resolution and a decree signed by the President. Several of the core strategic enterprises included in the original project have now been prepared for privatization and in several cases tenders have either been launched or are imminent (see Attachment 3). The Government’s proposal focuses on the completion of these most advanced privatization projects, as well as the component supporting the development of the capital markets. With the cancellation of the remaining loan balance, no new state enterprises will be prepared for privatization under the project. Moreover, activity under the post-privatization advisory services component of the project will cease. The reduced scope of the project as outlined in the Government’s proposal and the extensive discussions with the client over the period since their request has been received, provides a reasonable prospect for the successful implementation of the revised proposal.

8. It has been agreed with the Government to amend the PDOs as set out in paragraph 3 above, to bring them in line with what is feasible within current institutional capacity, the macro economic environment and the remaining project activities. The Government has requested to amend the Loan Agreement to reflect these changed PDOs (see Attachment 4). The Key Performance Indicators (KPIs) have likewise been amended to reflect the more focused project (see Attachments 2 and 4). These amended PDOs and KPIs also reflect achievements already made under the project. A draft letter which the Country Director will provide to the Government, after this Memorandum has been approved, is also attached (see Attachment 5).

9. The risks identified in the Project Appraisal Document remain. However, with the more narrowly focused objectives and the detailed action plan which has been agreed with the Government, a reasonable basis has been established to manage the risks during completion of the remaining activities. The action plan, which will form the basis for supervision of the project, includes in respect to each of the activities, (i) the steps to be undertaken, (ii) the responsible parties within the Government, and (iii) the relevant return dates. Monthly progress reports will be submitted to the Bank, in addition to a more intensive supervision schedule. Investment banks or other international advisers are assisting the Government in respect to all the activities. No new projects will be initiated.

Attachment 1

Project Development Objectives (PDOs) and Key Performance Indicators (KPIs)

Project Development Objectives

1. Improve efficiency of privatized enterprises.

2. Support the GoU’s implementation of case- by-case privatization to improve enterprise efficiency, and attract foreign know-how and capital.

Key Performance Indicators

Successful implementation of 30 enterprise restructuring plans by the end of the project (reduced to 20 during mid-term review in May 2001).

Actual status at closing of the loan:

5 privatized medium-sized enterprises are restructured. As discussed with the GoU and reflected in earlier supervision reports, the post-privatization restructuring component of the project should be closed given the difficulties experienced in implementing restructuring plans. Restructuring of large-scale enterprises remains an important objective and outcome of the case-by-case privatization component.

Sale of 7 large scale firms to strategic investors by the end of the project (reduced to 5 during mid-term review in May 2001).

Actual status at closing of loan:

There has not been a completed case-by-case privatization of a large or strategic enterprise. However, significant progress has been made in preparing a total of 10 enterprises for sale through investment tender, with four tenders announced and one launched (Attachment 3). Moreover, restructuring within strategic enterprises such as Uzbek Telecom and Uzbekneftegas is ongoing with the assistance of Commerzbank and BNP Paribas respectively.

3. Enhance effectiveness and widen public participation in capital markets and protect shareholders.

4. Strengthen the institutional capacity to facilitate enterprise reform.

Increase in shares on the stock exchange, improved mechanisms for trade of securities and more secure shareholder rights.

Actual status at closing of loan:

There have been some increase in share issues over the course of the loan, as well as recent issues of corporate bonds, but virtually no secondary market trading. Technical assistance to provide hard- and software to the Securities Center is ongoing, and therefore it is not yet possible to measure if the mechanisms for trading and shareholder protection have improved.

Stronger local private entrepreneurs and more foreign investment.

Actual status at closing of loan:

Several training sessions for local entrepreneurs have been conducted. Capacity to render advisory services has been created within the Enterprise Institution Building Bureau (EIBB), and in the State Property Committee more generally. However, it cannot be said that foreign investment has increased as a result this intervention, as the Private Investment Funds have not developed as envisaged.

Note: For proposed reduced PDOs and KPIs, please see Attachment 2.

Attachment 2

The reduced PDOs and KPIs are proposed to be as follows:

2. Present Project Development Objective

Support the GoU' s implementation of case-by- case privatization to improve enterprise efficiency, and attract foreign know-how and capi t a1 .

2. Proposed Reduced Project Development Objective

Support the GoU's implementation of case-by- case privatization to improve enterprise efficiency, and attract foreign know-how and capital, specifically through:

(i) the preparation for privatization of at least 10 large scale enterprises; and,

the sale of at least 1 large scale enterprise.

3. Present Project Development Objective

(ii)

Enhance effectiveness and widen public participation in capital markets and protect shareholders.

3. Proposed Reduced Project Development Objective

Enhance effectiveness in the functioning of the :apital markets, by improving access to and facilitating the flow of information on issuers, :urnover and prices.

Present Key Performance Indicator

Sale of 7 large scale firms to strategic investors by end of project (reduced to 5 during mid- term review in May 2001).

Proposed Reduced Key Performance Indicator

Sale of at least 1 large scale enterprise to a strategic investor by the end of the project.

3. Present Key Performance Indicator

Increase in shares on the stock exchange, improved mechanisms for trade of securities and more secure shareholder rights.

3. Proposed Reduced Key Performance Indicator

Improved mechanisms for trade of securities, through successful installation of the soft- and hardware systems as set out in the Global Architecture Design (GAD) report dated June 2003, and the Plan of Actions (POA) dated September 2003 (both as duly amended).'

As this intervention is scheduled to be completed only at the end of the extended loan period, it will not be possible to measure outcomes, apart from the successful installation of the system.

Attachment 3

Current Status of Ongoing Case-by-Case Privatization Transactions

1, However, important progress has been made in preparation for sale, and at present there are 10 case-by-case privatization transactions in different stages of implementation:

To date, there has not been a completed privatization of a large or strategic enterprise.

0 In respect to 8 of the enterprises (UzCable, Ammophos, Ahangarancement, KyzylkumCement, Uzmetkombinat, Kokand Spirit, Andijan Spirit, Elektrokhimprom, the tender has already been announced.

0 In respect to 1 more (Navoiazot), the valuation report has been completed and the tender is expected to be announced in May 2004.

0 In respect to Uzbektelcom, the audit report of Price Waterhouse Coopers was completed at the end of October 2003. The TA programs in relation to improvement of the legal environment, MIS and corporate strategy and business plan (funded by EBRD, ADB and the IFC) are still ongoing. The TA is expected to be completed in the second half of 2004. Simultaneously, Commerzbank is approaching potential investors to determine interest.

0 In addition to the above 10 transactions, the diagnostic and restructuring work in the strategically important NHC “Uzbekneftegas ” is ongoing.

2. There are also several other positive developments, which warrant considering extending the loan to complete the ongoing activities:

The GoU has increased the percentage of Uzcable’s shares offered for sale from 39 percent to 64 percent (earlier this was done for Ammophos to 51 percent and for Uzbektelecom to 70 percent). This is a major achievement in the political context of Uzbekistan.

0 The Cabinet of Ministers approved a Resolution #460 to implement one of the options recommended by the Investment Bank on the restructuring of Uzbekneftegaz. This is an important step towards the reform of this strategic sector.

0 Three IFIs - EBRD, ADB and IFC - are funding TA for Uzbektelcom after which they will decide whether to make a pre-privatization investment (TA expected to be completed in the second half of 2004). Simultaneously, Commerzbank is approaching potential investors to determine interest. This, too, is a notable achievement in the telecommunications sector.

Attachment 4

On the letterhead of the Ministry of Finance NoMW08-02-07/98- 1679 12 April 2004

Mr. Dennis De Tray Regional Director Europe and Central Asia World Bank

Dear Mr. De Tray:

Re: Enterprise Institution Building Project (EIBL), Amendments to Loan Agreement Herewith we propose to introduce amendments to the Loan Agreement, signed on July

10, 1998 between the International Bank for Reconstruction and Development and the Republic of Uzbekistan (Loan No 4353-UZ to implement Enterprise Institution Building Project). We note that these amendments have been discussed and agreed between the World Bank and State Property Committee (Goskomimushestvo) of the Republic of Uzbekistan earlier.

In order to complete the works on active contracts on case-by-case privatization of large- scale enterprises and on the project of capital market development we propose to introduce the following amendments into the text of Loan Agreement for Enterprise Institution Building Project :

1. Paragraph 1 of the Schedule 2 of the Loan Agreement is revised to read as follows: “Project objectives are the following: (a) to improve efficiency of privatized enterprises; (b) to assist in implementation of Borrower’s policy in case-by-case privatization and to attract foreign know-how and capital through: (i) the preparation for privatization of at least ten (10) large-scale enterprises; and (ii) the sale of at least one (1) large scale enterprise to strategic investor by end of Project; (c) enhance effectiveness in capital markets functioning by improving access to and facilitating the flow of information on issuers, turnover and prices; and (d) strengthening institutional capacity to facilitate enterprises reform according to the Resolution”.

2. In the attachment to Additional Letter No2 the second and third paragraphs should be read as follows:

Complete of ten (10) privatization plans and conclude a privatization contract from the Government side for at least one sale. Complete of systems’ modernization for securities market by end of Project”.

With best regards,

M.B. Nurmuratov Minister for Finance

Attachment 5

The World Bank INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION

1818 H Street N.W. (202) 477-1 234 Washington, D.C. 20433 U.S.A. Cable Address: INDEVAS

Cable Address: INTBAFRAD

April 12, 2004

Mr. Mamarizo Nurmurodov Minister of Finance Ministry of Finance Tashkent Republic of Uzbekistan

REPUBLIC OF UZBEKISTAN: Enterprise Institution Building Project (Loan No. 4353 UZ)

Amendments to the Loan Agreement And to Supplemental Letter No. 2 re: Pe$ormance Monitoring Indicators

Dear Mr. Minister:

We refer to the Loan Agreement (Enterprise Institution Building Project) dated July 10, 1998, between the Republic of Uzbekistan (the Borrower) and the International Bank for Reconstruction and Development (the Bank), as amended, and to Supplemental Letter No. Re: Performance Monitoring Indicators (Supplemental Letter No. 2) of the same date. We also refer to your letter dated April 12, 2004, requesting certain amendments to the Loan Agreement and to Supplemental Letter No. 2.

We hereby confirm the Bank’s agreement to the following amendments.

1. In Schedule 2 to the Loan Agreement, the first paragraph is revised to read as follows:

“The objectives of the Project are to: (a) improve efficiency of privatized enterprises; (b) support the Borrower’s implementation of case-by-case privatization to improve enterprise efficiency and attract foreign know-how and capital through: (i) the preparation for privatization of at least ten (10) large scale enterprises; and (ii) the sale of at least one (1) large scale enterprise; (c) enhance effectiveness in the functioning of capital markets by improving access to and facilitating the flow of information on issuers, turnover and prices; and (d) strengthen the institutional capacity to facilitate enterprise reform, consistently with the Resolution.”

2. to read as follows:

In the Attachment to Supplemental Letter No. 2, the second and third bullets are revised

“Completion of ten (10) privatization plans and Government award of ten (10) privatization contracts with a view to completing at least 1 privatization sale.

Completion of systems upgrading for the securities market by completion of the Project.”

Please confirm your agreement to these amendments by countersigning, dating and returning to us the enclosed copy of this letter. These amendments will become effective as of the date of countersignature upon receipt of the countersigned copy of this letter by us.

Sincerely,

INTERNATIONAL BANK FOR RECONSTRUCION AND DEVELOPMENT

By: Dennis de Tray

Director Europe and Central Asia Region

AGREED: REPUBLIC OF UZBEKISTAN

By: Mamarizo Nurmurodov Title: Minister of Finance

Date: